EDITORIAL: Petroleum sales have picked up and reached a 25-month high in November. The increase is attributed mainly to a curb in smuggling of diesel from Iran and seasonal agriculture harvesting demand, whereas the uptick in petrol sales is mainly due to higher demand owing to lower prices. Increased formal sales are assisting the government in approaching its ambitious petroleum levy collection target of Rs 1.28 trillion in FY25, with November marking the first month this year to meet the monthly target.
In November, HSD sales went up by 14 percent while 5MFY25 sales increased by 9 percent. The curb on smuggling is doing the trick. Industry sources say that Iranian smuggled sales are restricted to Balochistan, where it has been a norm for decades.
The wheat harvesting season typically leads to a high demand for diesel in November and December. In the case of petrol, monthly sales remained flat in November despite a yearly increase of 6 percent. Petrol sales are elastic, and prices play a role in demand as they have decreased by 21 percent from their peak in September 2023, leading to higher sales.
The economy is also exhibiting signs of improvement. Overall, sales growth is good for the formal oil and gas sector and helps the government generate higher revenues.
However, import volumes are rising, which is concerning. The government has the option to raise taxes in order to boost revenues, which can also help curb the increase in imports. Another issue is that refineries are not operating at full capacity due to a host of issues.
Despite the increase in demand, the Attock Refinery is currently operating at 66 percent capacity. This is linked to the compulsory import of RLNG from Qatar under long-term contracts.
Higher prices lead to a decrease in the demand for RLNG, prompting a reduction in local gas production to maintain its presence in the system which, in turn, negatively affects local crude production.
“Under the present circumstances it is criminal to reduce domestic gas and oil production to accommodate imported RLNG into the system, as it can permanently damage the production well,” argued Adil Khattak, CEO of Attock Refinery. “Then the government exports condensate produced in Sindh, which can be used locally,” he added.
The irrational decision-making does not end here. Another issue is the failure to fully utilise the capacity of refineries in the south. Due to the extremely low demand for furnace oil, Pakistan’s age-old refineries must produce FO as a residual product.
Some of these refineries produce this item at a rate of 30–35 percent. However, without a surge in furnace oil production, they operate at 70 percent, leading to an increase in petroleum product imports. The solution to this problem is to upgrade the refineries. Local companies have been anticipating finalising the refinery policy for three years.
There is also the issue of sales tax exemption that was supposed to be resolved in November, and now the prime minister has directed the petroleum division to sort it out within two weeks. Let’s see what magic can happen in a fortnight. Even with the policy’s finalisation, the upgrade will require two years.
We need to resolve the FO conundrum immediately. Currently, a partially upgraded refinery is producing 18-19 percent FO and exporting it at a significant loss. Ideally, it should be consumed locally. If the IMF condition of ending gas supply to captive power plants is implemented, some industrial players — especially in the South — can move to FO, as many have captive plants supporting FO installed in-house. The catch lies in pricing; if they meet the export parity price, the FO uptick problem may be of a lesser magnitude.
In short, while the increase in formal petroleum sales is encouraging, it raises the risk of imports and doesn’t completely address the issue of low refinery throughputs. Like other sectors in the energy industry, refineries are no less messy.
Copyright Business Recorder, 2024
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